Due to the decline in home values over the last few years, many people now find themselves with mortgage balances on their homes that exceed the value of their home. Many homeowners are underwater on their homes because of a second mortgage. Bankruptcy can provide relief to those people by stripping second mortgages provided certain conditions are met, but you must choose the correct chapter of bankruptcy in which to file.
Stripping a second mortgage can only be done in a Chapter 13 bankruptcy. If a second mortgage is totally unsecured due to the decrease in a home’s value, that mortgage can be stripped off in a Chapter 13 bankruptcy. If you successfully complete your Chapter 13 bankruptcy plan, the second mortgage is then no longer a lien on your home. It is treated just like other unsecured debts (i.e. credit cards or medical bills) and is discharged at the conclusion of the Chapter 13 bankruptcy.
To strip a mortgage in a Chapter 13 bankruptcy, the mortgage must be totally unsecured. Basically, all the equity in the home is eaten up by the first mortgage. For example, if you own a home worth $100,000.00 and your first mortgage balance is $100,000.00 or more, your second mortgage balance is unsecured and can be stripped in a Chapter 13 bankruptcy. Also, for example, if your home is worth $100,000.00 and your first mortgage balance is $99,999.99 or less, then your second mortgage is secured and cannot be stripped in a Chapter 13 bankruptcy. In sum, if a dollar of the second mortgage is still secured by equity in the home, then the whole second mortgage is secured.
You should contact a knowledgeable bankruptcy attorney to determine whether you can strip off your second mortgage. In my practice in northwest Indiana, I have successfully assisted many clients in stripping second mortgages off their homes.